Shareholder Primacy s Corporatist Origins: Adolf Berle and The Modern Corporation. William W. Bratton* and Michael L. Wachter**

Transcription

1 Shareholder Primacy s Corporatist Origins: Adolf Berle and The Modern Corporation William W. Bratton* and Michael L. Wachter** I. INTRODUCTION II. EARLY TO MIDDLE BERLE: FROM CORPORATE LAWYER TO CORPORATIST A. Early Berle: From Self-Regulation to Judicially Enforced Shareholder Primacy B. Middle Berle: The New Deal and Corporatism The New Individualism Corporatist Theory Berle s Corporatism in Practice: The National Industrial Recovery Act C. Summary III. THE MODERN CORPORATION AND PRIVATE PROPERTY IV. THE BERLE-DODD DEBATE A. Dodd s Attack B. Berle s Response C. Dodd Redux D. Berle s Closing Concession E. Summary of Berle-Dodd V. LATE BERLE: MODIFIED CORPORATISM A. The American Economic Republic B. Economic Planning C. Political Processes and Controls * Peter P. Weidenbruch, Jr., Professor of Business Law, Georgetown University Law Center, and Research Associate, European Corporate Governance Institute. ** William B. Johnson, Professor of Law and Economics, University of Pennsylvania Law School, and Co- Director, Institute for Law and Economics, University of Pennsylvania. For comments on previous drafts, our thanks to Dan Ernst, Tom Joo, David Millon, Mark Roe, and Leo Strine, participants at the Columbia Law School Conference on Berle and Means, as well as workshop participants at the Fordham, Georgetown, Miami, University of Pennsylvania, Vanderbilt, and Western Ontario law schools. For research assistance, our thanks to Meghan Hungate, Neela Mookerjee, Lauren Murphy Pringle, and Veena Viswanatha. This research was supported by the Dean of the Georgetown University Law Center and by the University of Pennsylvania s Institute for Law and Economics.

2 100 The Journal of Corporation Law [Vol. 34:1 D. Corporate Power The Political Position of Management The Role of Shareholders E. Summary VI. BERLE (AND DODD) TODAY A. The Contemporary Gestalt B. Dodd Today C. Berle Today Shareholder Primacy Corporate Social Responsibility VII. CONCLUSION I. INTRODUCTION A continuing and longstanding debate has been waged in corporate law scholarship among those who favor shareholder primacy, those who favor management discretion, and those who believe that corporations have a social responsibility to other constituencies, such as the corporation s employees, and the wider public interest. 1 Although the battle lines wax and wane, shareholder primacy prevails today as the dominant view, 2 with management discretion advocates in the minority, and with advocates of corporate social responsibility (CSR) as a rearguard. 3 Many discussants 1. See, e.g., William W. Bratton, Welfare, Dialectic, and Mediation in Corporate Law, 2 BERKELEY BUS. L.J. 59, (2005) (discussing the different paradigms with which to address corporate law); Jill Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. CORP. L. 637, 638 (2006) (challenging the shareholder primacy position); David Millon, Theories of the Corporation, 1990 DUKE L.J. 201, (describing the different positions in this debate as arguing over the fundamental nature of corporate activity and the appropriate goals of corporate law). The scheme described in the text is simplified. Many writers traverse the categories. For example, management discretion can be coupled with social responsibility. Shareholder value, if not shareholder primacy, can be coupled with management discretion. For a useful categorization of the shareholder primacy versus management discretion debate, see William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 CARDOZO L. REV. 261 (1992). Allen describes shareholder primacy as the property conception view: since the corporation is owned by its shareholders and the directors are the agents of the shareholders, the duty of the directors is to maximize the value of the corporation and thus the shareholders residual interest. Id. at Allen situates the management discretion view in the entity conception of the firm: since managers will act in the firm s best interests, granting managers greater discretion is better for corporations and thus ultimately for shareholders in the long run. Id. at See, e.g., Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J. 439, 439 (2001) ( There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value. ); Mark J. Roe, The Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. PA. L. REV. 2063, 2065 (2001) (noting that [s]hareholder wealth maximization is usually accepted as the appropriate goal in American business circles without normatively endorsing the proposition). 3. See Bratton, supra note 1, at (noting that each generation revives the social responsibility

3 2008] Shareholder Primacy s Corporatist Origins 101 think of themselves as picking up where Adolf A. Berle, Jr. and E. Merrick Dodd left off in their famous, precedent-setting debate of the 1930s. 4 The generally-accepted historical picture puts Berle in the position of being the grandfather of shareholder primacy. 5 Dodd, on the other hand, is cast as the original ancestor of CSR. 6 But this categorization of Berle and Dodd is mistaken an example of failing to understand old texts in their original context. This Article corrects these mistakes and offers a new reading of these fundamental texts of corporate law, texts that recently reached their 75th anniversaries: Berle s 1931 article, Corporate Powers as Powers in Trust, 7 Dodd s 1932 response, For Whom Are Corporate Managers Trustees?, 8 Berle s subsequent 1932 rebuttal For Whom Corporate Managers Are Trustees: A Note, 9 and, finally, Berle s famous book with Gardiner C. Means, The Modern Corporation and Private Property, 10 also published in Our critique despite its rearguard status). We note that concern for constituent interests does not necessarily imply a rejection of shareholder primacy. See Jeffrey N. Gordon, Employees, Pensions, and the New Economic Order, 97 COLUM. L. REV (1997) (recommending changes in pension fund investment practices). 4. See, e.g., Fisch, supra note 1, at 647 ( The origins of the shareholder primacy norm can be found in the classic debate between Merrick Dodd and Adolph Berle in the 1930 s.... ); Millon, supra note 1, at (beginning its discussion of shareholder primacy with an evaluation of the debate between Berle and Dodd); Donald E. Schwarz, Defining the Corporate Objective, 52 GEO. WASH. L. REV. 511, 521 (1984) (incorporating a brief discussion of the Berle-Dodd debate); C.A. Harwell Wells, The Cycles of Corporate Social Responsibility, 51 U. KAN. L. REV. 77, (2002) (discussing the Berle-Dodd debate in depth). 5. See, e.g., Stephen Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. REV. 547, 561 (2003) ( Berle thought the law should put renewed emphasis on managers fiduciary duty to maximize shareholder wealth. ); Ronald Chen & Jon Hanson, The Illusion of Law, 103 MICH. L. REV. 1, 34 (2004) ( Berle described the protection of shareholders as the critical challenge facing corporate law.... ); John H. Matheson & Brent A. Olson, Corporate Law and the LongTerm Shareholder Model of Corporate Governance, 76 MINN. L. REV. 1313, 1330 (1992) (substantiating Berle s status as grandfather of shareholder primacy); Lynn Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. CAL. L. REV. 1189, 1189 (2002) ( Berle argued for what is now called shareholder primacy the view that the corporation exists only to make money for its shareholders. ); Adam Winkler, Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History, 67 LAW & CONTEMP. PROBS. 109, (2004) (describing briefly the Berle-Dodd debate). 6. See, e.g., Bainbridge, supra note 5, at 561 ( Dodd argued that corporations have a social service [responsibility] as well as a profit-making function. ) (quoting E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 HARV. L. REV. 1145, 1148 (1932)); Bratton supra note 1, at 74 (noting that the CSR position originated with Dodd); Chen & Hanson, supra note 5, at 35 ( Merrick Dodd framed the corporate law problem in terms... emphasizing the threat posed by corporations to nonshareholders. ); George Dent, Jr., Corporate Governance: Still Broke, No Fix in Sight, 31 J. CORP. L. 39, 50 (2005) (noting that the CSR position originated with Dodd); Matheson & Olson, supra note 5, at 1330 (same); Stout, supra note 5, at 1189 (noting Dodd s advocacy of the CSR position); Winkler, supra note 5, at (noting that the CSR position originated with Dodd). 7. Adolf A. Berle, Corporate Powers As Powers In Trust, 44 HARV. L. REV (1931) [hereinafter Berle, Powers in Trust]. 8. E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 HARV. L. REV (1932) [hereinafter Dodd, Trustees]. 9. Adolf A. Berle, For Whom Corporate Managers Are Trustees: A Note, 45 HARV. L. REV (1932) [hereinafter Berle, Trustees Note]. 10. ADOLF A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (Macmillan 1933) (1932). 11. One of us has appraised the book through a more modern theoretical lens. See William W. Bratton, Berle and Means Reconsidered at the Century s Turn, 26 J. CORP. L. 737 (2001) (comparing Berle and Means

4 102 The Journal of Corporation Law [Vol. 34:1 reading resituates these texts in the historical and intellectual context in which they were written. The time was the Great Depression, then believed to have resulted from the inherent instabilities of a capitalist system. The consensus was that emerging, modern corporate institutions were an integral part of the flawed system and thus part of the problem. The question of social responsibility was whether corporations should be treated as public institutions with obligations to mitigate the system s inherent instability, even if these obligations conflicted with maximizing shareholder returns. Parties to today s debate between shareholder primacy and management discretion ignore that question, even as it continues to be posed by the social responsibility rearguard. Today s mainstream assumes maximal returns to the firm as the only end and debates solely about the means, 12 with the dispute centered on the allocation of authority between managers and shareholders. 13 In contrast, both Berle and Dodd answered yes to the question of CSR. The legal allocation of authority within the firm did come up in their discussion at a secondary level, but in a convoluted posture that can be made intelligible only by reference to the evolution of Berle s thinking in the rapidly changing political environment of the early 1930s. Any resemblance between the normative issues Berle and Dodd discussed and those in today s debate between management discretion and shareholder rights is more apparent than real. For Berle and Dodd, the normative issue was the appropriate policy response to the crisis of the Great Depression. In 1932, when Berle and Dodd started their debate, it was abundantly clear that the job of formulating that policy would fall into the hands of a new Democratic administration likely to be headed by Franklin Delano Roosevelt (FDR). It was expected, although not yet certain, that FDR would follow the lead of many European leaders of the time and adopt a form of corporatism as the political economy of the United States. Corporatism sharply differs from the pluralism that dominated political thinking both before and after the New Deal. Under pluralism, only the preferences of individuals in their role as citizens count in the welfare calculus of government policy, and competition for the votes of individuals in a political marketplace determines policy outcomes. Corporatism privileges cooperation over competition and emphasizes group over individual interests. 14 It assumes that government, through consultation with the with corporate legal theories presented by John Dewey and William O. Douglas). 12. Compare Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833 (2005) (discussing the allocation of power between boards of publicly traded companies and their shareholders), and Lucian A. Bebchuk, Reply: Letting Shareholders Set the Rules, 119 HARV. L. REV (2006) (proposing arguments to increase shareholder decision-making power), with Stephen M. Bainbridge, Director Primacy and Shareholder Disempowerment, 119 HARV. L. REV (2006) (critiquing Bebchuck s proposal to increase shareholder power). 13. For an account that connects the increased institutional importance of the board of directors in governance to market-based opportunities for more aggressive protection of the shareholder interest, see Jeffrey N. Gordon, The Rise of Independent Directors in the United States, : Of Shareholder Value and the Stock Market Prices, 59 STAN. L. REV (2007). For a recent article advocating institutional reform for the purpose of enhancing shareholder power, see Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675 (2007). 14. One of us recently described the corporatist context of the New Deal. See Michael L. Wachter, Labor Unions: A Corporatist Institution in a Competitive World, 155 U. PA. L. REV. 581 (2007) (discussing the

5 2008] Shareholder Primacy s Corporatist Origins 103 major groups in society, can articulate an objectively cognizable public interest. Once the public interest is expressed, government calls on the various groups, with the corporation being one of the most important, to adapt their positions in support of it. Corporatism implies a radical restatement of the purpose of the business corporation. It does assume capitalism and a system of private property rights and has no trouble accepting the legal model under which directors must maximize the value of the corporation. But it does this only at the threshold, the point at which corporations come to the state-directed table where the groups determine the public interest. Given a determination, the calculus of corporate rights and duties must adjust and recognize a public interest constraint. Specifically, corporate directors have a duty to manage the business and affairs of the corporation in accordance with clearly articulated public policies, even if those policies interfere with the property interests of shareholders. Putting this in the terms of the theory of the firm, corporatism views the corporation as an entity that operates as an organ of the state and assumes social responsibilities. Both Berle and Dodd brought these corporatist assumptions to their debate. That alone inserts a normative barrier between their discussion and today s back-and-forth between shareholder primacy and management discretion in a pluralist and marketoriented political context. It also introduces a significant contextual barrier between Berle and Dodd and modern CSR. Two questions arise in light of this barrier: first, what exactly were Berle and Dodd fighting about, and, second, whatever that was, how can it be that today s corporate legal theorists so casually assume the Berle-Dodd debate s continuing pertinence? By hypothesis, there must be a theoretical account that gets us over the barrier and explains the connection between the Berle-Dodd debate and the subsequent evolution of corporate legal theory. There is, but the answers to the two questions are much more complicated than they appear to the modern reader. This Article works through the complications, holding out solutions to a number of puzzles long unsolved in corporate legal theory. The binary picture of Berle as shareholder primacy and Dodd as CSR appears on a noisy historical screen. Some modern writers do acknowledge Berle as a CSR ancestor, 15 introducing a conflicting characterization. The conflict follows from contradictions in Berle s texts, with parts of The Modern Corporation and the 1932 rebuttal supporting a shareholder primacy reading, while other passages in The Modern Corporation presage CSR. Compounding the confusion, Dodd can also be read in different ways. Although most align him with modern CSR, others see him more as an advocate for management discretion, with social responsibility as just another area inside the zone of business judgment. Berle himself made the latter characterization of Dodd, 16 as do a small number of modern writers. 17 A changes in the political economy and its effect on labor unions over the last 50 years). 15. See, e.g., Bratton, supra note 1, at 68 (arguing that proponents of Berle expanded his theories to include public interests); Millon, supra note 1, at 222 (quoting an acknowledgement by Berle that another legal system may require corporate social responsibility); Terry A. O Neill, Toward a Theory of the Closely Held Firm, 24 SETON HALL L. REV. 603, (1993) (claiming that Berle predicted future firms would be socially responsible). 16. Adolf A. Berle, Modern Functions of the Corporate System, 62 COLUM. L. REV. 433, (1962) [hereinafter Berle, Modern Functions]. 17. See LAWRENCE E. MITCHELL, CORPORATE IRRESPONSIBILITY: AMERICA S NEWEST EXPORT (2001) (demonstrating that Dodd believed business people with power would act responsibly); Thomas W. Joo, Race, Corporate Law, and Shareholder Value, 54 J. LEGAL EDUC. 351, 353 (2004) (stating that Dodd believed

6 104 The Journal of Corporation Law [Vol. 34:1 third puzzle stems from changes of position in both authors later writings. Dodd reversed his 1932 position in 1941, 18 to be followed by Berle s concession in 1954 that Dodd s debate position had been proven correct. 19 This Article shows that these complications followed from adjustments of position made by both Berle and Dodd as events unfolded in their own time, a context so far removed from that which exists today as to block either side from a legitimate claim to direct ancestry. Part II looks at Berle s evolution from a 1920s corporate lawyer to a 1930s academic and public intellectual. We call this the transition from Early Berle, who did indeed articulate a version of shareholder primacy, to Middle Berle, a corporatist on the national political stage. The discussion details the basic terms of corporatist political theory and their brief appearance in federal law in the National Industrial Recovery Act of Part III takes up The Modern Corporation, 20 distinguishing the parts of the book that set out Early Berle positions from the parts that anticipate Middle Berle, fleshing out the latter by reference to Berle s contemporaneous political writing. Part IV unpacks the Berle-Dodd debate, including rebuttals and later recantations. Part V moves on to Berle s post-war modification of his Depression-era corporatism, which we call Late Berle, highlighting the minor role he accorded to corporate governance in a scheme that integrated the legal firm within a broader theory of economics, politics, and society. Part VI relocates Berle and Dodd in the context of today s debates with indeterminate results. Our restatement of Berle and Means and Berle and Dodd poses a question as to modern day implications: if the modern shareholder primacy position is indeed rooted in Berle, then does the shareholder primacy viewpoint gain coherence once Berle s true position is understood? The same question can be asked of the coherence of the viewpoint of the CSR rearguard with respect to the contextualized depictions of Berle and Dodd. The Conclusion addresses these questions. Our contextualization of Berle and Means and Berle and Dodd may also hold lessons for the future. This is a story about corporate law at a time of regime change. Berle, as a political figure and corporate law scholar, was at the center of this change in regime. The question was whether the capitalist system could survive outside of the regulated state. For Berle, the challenge then was to find a way for corporate law to deal constructively with regulatory issues. Because those issues arose outside of the corporate law box, thinking inside of the corporate law box could not adequately address them. Accordingly, the narrowly drawn fiduciary duty that protects only the residual claim of the shareholders was inadequate. Berle widened the scope of the duty so that directors could not only address and comply with a broad, new set of government-specified rules, but also be cooperative participants in a common enterprise with the regulators. In today s shareholder primacy world, corporations are compliant, but not cooperative corporations serve certain segments of society); Dalia Tsuk, Corporations Without Labor: The Politics of Progressive Corporate Law, 151 U. PA. L. REV. 1861, (2003) (illustrating that Dodd believed business practices would support social goals). 18. See generally E. Merrick Dodd, Jr., The Modern Corporation, Private Property, and Recent Federal Legislation, 54 HARV. L. REV. 917, (1941) [hereinafter Dodd, Modern Corporation] (explaining his views on American corporations). 19. ADOLF A. BERLE, JR., THE 20TH CENTURY CAPITALIST REVOLUTION 169 (1954) [hereinafter BERLE, 20TH CENTURY]. 20. BERLE & MEANS, supra note 10.

7 2008] Shareholder Primacy s Corporatist Origins 105 players of the regulatory game. When the existing regime runs its course and a new regime dawns, as at some point it certainly will, Berle s cooperative model of corporate duties may become relevant once again. II. EARLY TO MIDDLE BERLE: FROM CORPORATE LAWYER TO CORPORATIST Adolf Berle received a Rockefeller Foundation grant for an interdisciplinary study of corporations in 1927, 21 a project that five years later would result in The Modern Corporation and Private Property. The performance of the American economy would change rapidly and radically during the five-year period of research and composition, and so would Berle s ideas about regulation and corporate law. He began the period as an advocate of corporate self-regulation. He soon shifted to a view favoring judicially enforced shareholder primacy. He also was reflecting on the broader political economy, emerging in as an advocate of corporatist solutions to the national economic crisis. His views registered strongly both in FDR s 1932 campaign and in the legislative program of the Hundred Days of 1933, when corporatism came to the fore in national regulatory policy. This Part recounts this development, laying the groundwork for our reconsideration of The Modern Corporation and the Berle-Dodd debate in Parts III and IV. A. Early Berle: From Self Regulation to Judicially Enforced Shareholder Primacy At the time of the Rockefeller Foundation grant, Berle was a Wall Street lawyer with an academic bent. Strictly speaking, that description fit him for the rest of his career: although he took up an academic appointment at Columbia Law School in 1928, Berle never closed his downtown law office. At the same time, Berle the lawyer published a well-known series of commentaries on corporate law. 22 Berle focused on management power and the shareholders inability to control it even in these early writings. 23 The separation of ownership and control, then a new phenomenon, was occasioning reexamination of settled matters of law. Management power had traditionally been restricted in the articles of incorporation, or, alternatively, by owner-shareholders. By the time ownership dispersed in the early decades of the twentieth century, the large corporations had general charters that omitted the restrictions. Managers emerged with new powers they could enter new businesses and issue new stock to fund the ventures at will. Courts and legislatures were grappling with how to treat the inherited legal framework in light of this development. 24 Should charters be interpreted as complete 21. JORDAN A. SCHWARZ, LIBERAL: ADOLF A. BERLE AND THE VISION OF AN AMERICAN ERA 51 (1987). 22. For a summary of this series, see ADOLF A. BERLE, JR., STUDIES IN THE LAW OF CORPORATE FINANCE (1928) [hereinafter BERLE, CORPORATE FINANCE]. 23. See id. at v vi, (arguing that allowing managers to determine the property rights of shareholders eroded their ability to control corporations); id. at 37 (stating that shareholders cannot afford to enforce their rights). 24. Statutes of general incorporation became common in the 1870s and 1880s. JAMES WILLARD HURST, THE LEGITIMACY OF THE BUSINESS CORPORATION IN THE LAW OF THE UNITED STATES, , at 56 (1970). However, this first generation of general incorporation statutes carried numerous restrictions on the form a corporation could take. Id. at Over the next several decades, there was debate over how strong these restrictions should be. Id. A second generation of incorporation statutes that made the corporate purpose provisions a default rather than a mandatory provision became common in the 1930s. Id. at

8 106 The Journal of Corporation Law [Vol. 34:1 contracts and enforced according to their literal terms, or were there implied fiduciary constraints that required judicial enforcement? The Berle of the 1920s favored a contractual approach. He expressed skepticism respecting prospects for constructive judicial intervention: [C]ourts cannot be expected to work out rules of conduct for the business community except with the guidance and assistance of business men themselves, and for this purpose business standards themselves must be made apparent. 25 For this Berle, the problem was that the sources of corporate regulation corporate charters and statutes were not helping to make business standards apparent. Then, as now, the standard practice favored broad drafting toward the end of according management discretion to run the business. Berle, looking to protect the interests of the holders of shares in publicly traded firms, saw a need for constraints on management discretion. He wanted the problem to be solved by business men themselves, and looked to self-regulatory reforms. 26 More particularly, he suggested: (1) that investment bankers organize themselves into an enforcement body to facilitate scrutiny (and screening) of firms making public securities offerings; (2) that the stock exchanges withhold listing from firms whose managers abused their power and demand disclosure of corporate information; and (3) that large institutional shareholders like insurance companies position themselves to obtain accurate information about issuers and to protect shareholder rights. 27 With respect to institutional shareholders he had a more specific suggestion: Suppose... trust companies were in the habit of accepting, on custodian account, deposits of stocks from small shareholders, thereby gathering many small holdings into an institution commanding a block so large that protection was worth while, and that they also provided themselves with power to represent the depositors of stock. Such institutions could easily keep themselves informed as to the affairs of the corporation... and, as representing their clients, could take the action necessary to prevent or rectify violations of property rights Ironically, each of the items on Berle s list has shown up prominently in recent governance debates. 29 Those advancing these positions today do so from the deregulatory wing of the corporate law academy, inviting the label contractarian. 30 The political 25. BERLE, CORPORATE FINANCE, supra note 22, at For a contemporary articulation of this position rooted in the economic theory of the firm, see Edward Rock & Michael L. Wachter, Islands of Conscious Power: Law, Norms and the Self-Governing Corporation, 149 U. PA. L. REV (2001). 27. BERLE, CORPORATE FINANCE, supra note 22, at Id. at See, e.g., Bernard Black & Reinier Kraakman, A Self Enforcing Model of Corporate Law, 109 HARV. L. REV (1996) (arguing that large outside shareholders could self-enforce corporate governance standards); Paul G. Mahoney, The Exchange As Regulator, 83 VA. L. REV (1997) (suggesting selfregulation by the securities exchanges); Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J (1998) (advocating a market-oriented approach of competitive federalism to securities regulation). 30. For an exposition of the contractarian point of view, see FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 1 39 (1991) (explaining contractarianism).

9 2008] Shareholder Primacy s Corporatist Origins 107 implications were quite different in the 1920s, however. Berle was staking a position as a reformer. Indeed, his approach had a precise analogue in the industrial pluralism of the institutional economist John R. Commons, with its view of the state as the enforcer of bargains entered into by self-constituted groups representing adverse economic interests. 31 Berle, in fact, contemporaneously published short opinion pieces that speculated about movement toward worker ownership. 32 Berle s attitude toward regulation would change even before the stock market crashed. 33 The catalyst was Gardiner Means. Berle s Rockefeller grant required the participation of an economist. This prompted Berle to engage Means, an economics graduate student and childhood friend, 34 as a statistical and economics research assistant. 35 Means contributed The Modern Corporation s empirical studies of corporate concentration and dispersed share ownership. 36 His empirical results showed that onethird of the national wealth lay in the hands of 200 large corporations. Means projected that, given continuation of the present rate of growth of that relative share, 70% of economic activity would be carried on by 200 corporations by 1950, even as share ownership became more and more dispersed. 37 The upshot was that economic power was concentrating in the hands of a cluster of corporate managers, the same group whose level of responsibility already had come to concern Berle. (These projections of increasing concentration would prove to be fundamentally wrong, but only much later; classical economics was still in its infancy.) 38 At the time, Means projections sent a loud and clear message: something had to be done about corporate power, something more than Berle had thought previously. Berle changed his views accordingly. What he formerly saw as a governance problem to be treated contractually within the financial community, he now came to see as a case for judicial control in the name of the shareholder interest. 39 Berle stated this position in Corporate Powers as Powers in Trust in the Harvard Law Review in 1931, 40 an article that previewed legal points in the upcoming The Modern Corporation without a hint as to the political-economic framework in which the book would encase them. More particularly, the article restates what was then considered the problem of corporate power: Of recent years aggregations of capital have been collected from the public sale of stock in corporations with paper powers which are broad enough to permit them to rove the world at will. 41 The article then launches into a 31. See Daniel R. Ernst, Common Laborers? Industrial Pluralists, Legal Realists, and the Law of Industrial Disputes, , 11 LAW & HIST. REV. 59, (1993). 32. SCHWARZ, supra note 21, at The change had occurred by the spring of Id. at Id. at ADOLF A. BERLE, JR., NAVIGATING THE RAPIDS, , at 21 (Beatrice Bishop Berle & Travis Beal Jacobs, eds. 1973) [hereinafter BERLE, RAPIDS]. 36. Berle eventually conceded co-authorship and one-third of the royalties. SCHWARZ, supra note 21, at BERLE & MEANS, supra note 10, at 9, 37, Berle would later be forced to adjust his numbers as the prediction failed to prove out. See infra text accompanying note BERLE & MEANS, supra note 10, at Berle, Powers in Trust, supra note Id. at 1066.

10 108 The Journal of Corporation Law [Vol. 34:1 discussion of fiduciary duty as a means of addressing the problem, asserting that the arguably archaic and longstanding rule that a corporation was for the benefit of its owners remained true when ownership and control were separated. 42 Managers were trustees of the shareholders and so might only exercise their wide ranging powers for the benefit of the shareholders. More particularly, the use of the power is subject to equitable limitation when the power has been exercised to the detriment of [shareholder] interest, however absolute the grant of power may be in terms, and however correct the technical exercise of it may have been. 43 The role of the judiciary was to enforce this principle. This was by no means a settled principle of law. Berle accordingly marshaled the cases, pointing to a variety of rules that constrained exercises of managerial authority. For example, the directors power to issue stock was limited by the requirement that the ratable interest of existing and prospective shareholders be protected. 44 The power of directors to withhold dividends provided a second example: while directors generally had freedom to withhold dividends, courts would force distribution when the reason for the withholding was a non-business purpose. 45 Third, the power to acquire stock in another corporation had to be used for the benefit of the acquiring corporation and not for managerial interests. 46 A final example involved the power to amend the certificate of incorporation. In this setting, the power rested with the majority of shareholders rather than the directors, but the rule remained the same majority power was subject to equitable limitations. 47 The only distinction between the exercise of shareholder power and that of directors was that the vote of shareholders would at least tend to create a presumption that action taken benefits all of such shareholders. 48 But the presumption could be rebutted by a showing that the majority was a group that had interests adverse to the corporation as a whole. All of these cases presupposed an active judiciary that would evaluate business decisions on a fact-specific basis. Berle looked to a principles-based rather than rulesbased jurisprudence. His remarks on the law of preemptive rights reflected his view of corporate law generally: The only conclusion that can be drawn from the tangled history of preemptive rights is that the doctrine arose from an attempt to impose an equitable limitation on an apparently absolute power of directors to issue stock; that it should never have hardened into a rigid rule of law, and that it should revert to its original status as a remedy, available in equity and possibly, by 42. Id. at Id. at Id. at Berle, Powers in Trust, supra note 7, at Examples of this include Dodge v. Ford, 170 N.W. 668 (Mich. 1919), where the Ford board withheld dividends purportedly to share the wealth the company had created with its customers rather than its stock owners, or, more starkly, when the father-owner of a close corporation withheld dividends to discipline his family. 46. Berle, Powers in Trust, supra note 7, at Thus, a cross-stock ownership scheme between the Prudential and Fidelity corporations that was implemented for the purpose of management entrenchment was struck down. Robotham v. Prudential Ins. Co., 53 A. 842 (N.J. Ch. 1903). 47. Berle, Powers in Trust, supra note 7, at Id. at 1067.

11 2008] Shareholder Primacy s Corporatist Origins 109 transposition, at law. 49 Berle summed up with a two-prong test to assess the legitimacy of actions taken by managers: first, whether the technical power for the action existed, and second, whether the action was consistent with the managers role as a fiduciary to the shareholders. 50 The latter prong was to be guided by the analogous rules of trust law. 51 This logic of the proposed test resonates in modern Delaware corporation law, which also looks first for power to act and thereafter asks whether the fiduciary duty to act in the interest of the shareholders has been violated. 52 Delaware also imposes special duties on controlling shareholders, but the resemblance occurs only at this high level of generality. Berle s article also evinces his deep distrust of managers and his belief that their power needed some form of significant, substantive constraint. Here, Powers in Trust loses its resonance with today s Delaware jurisprudence even as it can be tied to the line of contemporary corporate legal theory stressing shareholder primacy. 53 Berle would continue to distrust managers and advocate their constraint for the rest of his career. But that distrust would very soon reconstitute itself in a form utterly alien to today s advocates of shareholder primacy. B. Middle Berle: The New Deal and Corporatism Thus did Berle make his mark as a corporate law academic in He also had an interest in national policy issues. The Modern Corporation and Private Property, still in preparation, would synthesize both areas of interest. Before turning to that text, we follow Berle, the public intellectual, to the national political stage. Governor Franklin Roosevelt reached out to academics for assistance with policy positions early in his 1932 presidential campaign. Roosevelt recruited Raymond Moley, a government professor at Columbia. Moley then recruited Berle for expertise on credit and corporations along with a Columbia economics professor, Rexford Tugwell, for expertise on agriculture. Together they made up the core of what came to be called Roosevelt s Brains Trust Id. at Id. 51. Id. 52. The requirement of power to act follows from Delaware General Corporation Law sections 141(a) and 142(a). The former section vests management authority in the board of directors and the latter section mandates the appointment of officers to execute the board s business decisions. See DEL. CODE ANN. tit. 8, 141(a), 142(a) (2001 & Supp. 2006). Formal approval and delegation must occur case by case. Subsequent fiduciary scrutiny follows from section 144 and the common law. See id. 144 (providing for scrutiny of conflict of interest transactions); see also id. 102(b)(7) (permitting opting out in limited circumstances). 53. Berle s positions would echo strongly for the rest of the twentieth century in academic work advocating a more restrictive fiduciary regime than that imposed by Delaware. See, e.g., William L. Cary, Federalism and Corporate Law: Reflections on Delaware, 83 YALE L.J. 663 (1974) (suggesting federal intervention in formulating fiduciary standards); Marvin A. Chirelstein, Towards a Federal Fiduciary Standards Act, 30 CLEV. ST. L. REV. 203 (1981) (discussing whether Congress should act in the field of managerial conduct and arguing that the idea of federal legislation is instrumental in solving fiduciary problems). 54. SCHWARZ, supra note 21, at

12 110 The Journal of Corporation Law [Vol. 34:1 1. The New Individualism Berle sketched out his position even before joining the campaign, pitching it to Louis Brandeis in a letter dated February 22, Brandeis was a prominent New Freedom progressive who advocated aggressive antitrust enforcement for the restoration of market competition, prohibition of unfair trade practices, and protection for small business. 56 Berle, in contrast, thought market competition was part of the problem. Although corporate concentration had gone too far, he wrote, the antitrust platform did not provide a viable approach to the economic crisis of Better to accept the large economic units and mold them so as to make them useful to the people. State capitalist planning could address the economic crisis even as the individual was protected. Once inside the campaign, Berle promptly set out these ideas in a memorandum to Roosevelt entitled The Nature of the Difficulty. 58 Success with Roosevelt was by no means guaranteed. Although Moley and Tugwell were of one mind with Berle, 59 Roosevelt liked to surround himself with advisors espousing competing positions. One such advisor was Felix Frankfurter, an old nemesis of Berle s, 60 who, along with a cadre of acolytes, still hewed to the economic liberalism of decades before. 61 Berle s star ascended, however, and he received the go-ahead from Roosevelt to draft a campaign speech that would represent a philosophical statement of the candidate s economic policy. The speech, New Individualism, was delivered by Roosevelt on September 23, 1932 to the Commonwealth Club of San Francisco, a prestigious club of nonpartisan individuals interested in matters of government. 62 The speech by all accounts the most radical of FDR s campaign 63 was received tepidly, if not with some hostility. 64 It has since received a good deal of attention among political scientists, even making a list of the 100 most important political speeches in American history. 65 The speech naturally did not carry Berle s signature, but it is generally agreed that Berle (and 55. Id. at See DONALD R. BRAND, CORPORATISM AND THE RULE OF LAW: A STUDY OF THE NATIONAL RECOVERY ADMINISTRATION 65 (1988) (summarizing the political agenda of New Freedom progressives). 57. SCHWARZ, supra note 21, at Id. 59. See BRAND, supra note 56, at (summarizing Moley and Tugwell s economic and political stance). 60. It might be more accurate to say that Berle was an old nemesis of Frankfurter s. Berle had Frankfurter as a teacher during his first year at Harvard Law School and reportedly harassed Frankfurter rudely and mercilessly during their class sessions. Frankfurter was rumored to have played a role in Berle s not being invited to join the Harvard Law Review after his second year. Although Berle s grades were higher than those of some who made the Review in that second round, his biographer sees no reason to infer professorial interference, suggesting that Berle had been as unpopular with his classmates as he had been with his professors. See SCHWARZ, supra note 21, at Id. at Id. at Id. at 79; Franklin Delano Roosevelt, Address Before the Commonwealth Club (Sept. 23, 1932), available at [hereinafter Roosevelt, Address] (containing the text of the speech). 64. Davis W. Houck, FDR s Commonwealth Club Address: Redefining Individualism, Adjudicating Greatness, 7 RHETORIC & PUB. AFF. 259, 262 (2004). 65. It ranked 78th. See University of Wisconsin-Madison, Top 100 American Speeches of the 20th Century,

13 2008] Shareholder Primacy s Corporatist Origins 111 his wife Beatrice) wrote it and that Roosevelt accepted it with very minor changes. 66 It is also agreed that the speech in fact represented its author s views and presaged the economic program of the New Deal. That the speech may not have represented Roosevelt s views is less important for our purposes. The new individuals of the speech were ordinary citizens. They had economic rights the right to make a comfortable living and the right to own property. Those rights needed to be protected in order to ensure the safety of savings. 67 The parties infringing the rights were corporate managers, the princes of property, 68 who exercised powers in trust. 69 Note that the text at this point diverges from the shareholder primacy of Corporate Powers as Powers in Trust. Even as the phrase princes of property bespeaks concern about management power, Berle displaced the shareholder as his trust beneficiary with the new individuals. That accomplished, Berle reached the punch line: private property rights would need to give way in the face of the public interest. Where a year and half earlier the managers private economic power had implied a private trust, the implied trust was now public. The speech went on to call for government controls. Continued sufferance of management power depended on the trust s fulfillment: the princes of property had to assume responsibility for the public good, end their internecine disputes, come together as industrial groups, and cooperate toward a common end. Should any such group defect from cooperation, the government would intervene with punishment. 70 Thus coordinated, firms could serve the people adjusting production to consumption and distributing wealth more equitably. 71 The chaotic marketplace would be disciplined by an economic constitutional order. 72 Said Berle: The day of the manager has come. 73 Although that last point was debatable, Roosevelt s day would come soon enough and the New Individualism would find its way into public policy. Berle used new individualism to contrast with the old individualism of Frankfurter and the other New Freedom progressives and its stress on small business and strict antitrust enforcement. 74 Collectivism was the more common term at the time. 75 We prefer the more precise term corporatism. 76 Corporatist policies had been debated in European political circles 66. SCHWARZ, supra note 21, at BERLE, RAPIDS, supra note 35, at Id. 69. See Berle, Powers in Trust, supra note 7 (summarizing powers in trust exercised by corporate managers). 70. BERLE, RAPIDS, supra note 35, at SCHWARZ, supra note 21, at BERLE, RAPIDS, supra note 35, at Id. 74. SCHWARZ, supra note 21, at Id. at 79 (quoting Tugwell); see also ELLIS W. HAWLEY, THE NEW DEAL AND THE PROBLEM OF MONOPOLY 35 (1966) (commenting on the emergence of a cooperative collectivist democracy as one of three schools of thought in the political struggle of the NIRA period). Schwarz describes Berle s approach in two conjoined phrases: state capitalism and corporate liberalism. SCHWARZ, supra note 21, at 68. Corporatism effectively merges the two. 76. We do not claim an original observation. Roberta Romano also interprets Berle as a corporatist. Roberta Romano, Metapolitics and Corporate Law Reform, 36 STAN. L. REV. 923, 936 (1984); see also Wells, supra note 4, at (explaining that Berle s 1950s vision of society based on the corporation was a variant of corporatism).

14 112 The Journal of Corporation Law [Vol. 34:1 and had impacted European government policy since the late nineteenth century. They came to the fore of policy discussions in the United States in the early 1930s as the depth of the economic crisis became apparent. Berle explained it as follows in a memorandum to Roosevelt in the summer of 1932: [I]t is necessary to do for this system what Bismarck did for the German system in 1880, as result of conditions not unlike these.... Otherwise only one of two results can occur. Either these handful of people who run the economic system now will get together making an economic government which far outweighs in importance the federal government; or in their struggles they will tear the system to pieces. Neither alternative is sound national policy. 77 Berle s New Individualism speech thereafter brought corporatism to the forefront of American electoral politics. We acknowledge that the term corporatism is not well known in the United States. Indeed, those who do know it tend to avoid it, 78 no doubt due to its association with the fascist politics of the European countries that formally adopted corporatism during the 1920s and 1930s. 79 But those associations can be put aside here, not only as regards the context of 1932, but as regards the views Berle expressed for the remainder of his career. At the same time, we make only a limited descriptive claim for corporatism. We use it as a heuristic for the texts under discussion and for one subset of New Deal legislation. 80 Thus employed, it highlights the magnitude of the conceptual gulf that separates what Berle, Means, and Dodd talked about from what we talk about today. Corporatism does We also note that Berle has been characterized as a pluralist. See Dalia Tsuk, From Pluralism to Individualism: Berle and Means and 20th-Century American Legal Thought, 30 LAW & SOC. INQUIRY 179, (2005) (arguing that Berle and Means helped re-shape a legal pluralist vision of the modern state in their collaborative work during the 1920s and 1930s). Tsuk situates Berle by reference to early twentiethcentury political theorists she terms legal pluralists. Id. We have no quarrel with her description of the ideas in circulation and their application to Berle, but we think the term corporatism and the associated bundle of concepts describe him better. We also think that the transition from Early to Middle Berle effected a break Early Berle was influenced by ideas descended from the European legal pluralists of the nineteenth century; Middle Berle was not. For a description of the European legal pluralists, see Anna Di Robilant, Genealogies of Soft Law, 54 AM. J. COMP. L. 499, (2006). See also Ernst, supra note 31, at (describing grouporiented reformers of the early twentieth century as liberal pluralists and going on to distinguish within the group industrial pluralists who favored contractual solutions among empowered groups without strong state intervention from a more interventionist group of legal realists). In Ernst s description, the legal realists differed one from the other depending on their willingness to turn away their critical eyes and back the social welfare formulations of an interventionist state. Id. at Early Berle can be associated with the former subgroup, see supra Part II.A., while Middle Berle s affinities lay strongly with the latter subgroup, in particular, Thurman Arnold (prior to his entry into government). Ernst, supra note 31, at SCHWARZ, supra note 21, at A leading historian of the New Deal describes the early New Deal corporatists as, alternatively, advocates of a vision of a business commonwealth and advocates of a cooperative, collectivist democracy. See HAWLEY, supra note 75, at 35 (outlining the two alternative ideologies as part of a three-cornered system that also included the old, established market-driven ideology). 79. The first full adoption of a corporatist policy was in Benito Mussolini s Italy in 1922, with a few other European countries following suit during the 1920s. HOWARD J. WIARDA, CORPORATISM AND COMPARATIVE POLITICS 40 (1997). 80. We do not claim that the New Deal was broadly corporatist. New Deal policies and legislation developed in reaction to events and drew on a range of ideologies. See DANIEL T. RODGERS, ATLANTIC CROSSINGS: SOCIAL POLITICS IN A PROGRESSIVE AGE (1998) (referring to Italian corporatism).